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Westpac boss confirms bank opposes many potential reforms – live Australia's highest-paid executive faces grilling – live
(35 minutes later)
We open by talking about one aspect of Macquarie’s business dealing, Macquarie Equities Limited, which is basically a stock brokerage.
They contributed .5% of Macquarie’s profit in 2013, which is not a huge amount. So it is interesting that this slice of the business is what the commission wants to concentrate on.
Now it’s on to the private wealth arm.
Just how big is Macquarie?
It is operating in more than 25 countries. It has a market capitalisation of $39bn and a consolidated net assets of just over $18bn.
It also manages about $500bn, that’s half a trillion, worth of assets.
So, big.
It’s now time for Australia’s highest paid chief executive, Nicholas Moore, who heads up Macquarie, to take the stand.
Moore received a total reported renumeration of $18.9m in the last financial year, after Macquarie posted a $2.6b profit.
He will be stepping down as the CEO at the end of next week, after 32 years with the bank.
Just to go back to some of the recommendations for change that Westpac opposed, Michael Hodge took Brian Hartzer back to a meeting the bank held with Apra, where some of the regulation changes were discussed.
Hodge asked Hartzer about a minute in the meeting, which said:
“Brian thinks unfair everyone has to go through CBA exercise when nothing has gone wrong to CBA’s scale.”
Hartzer said he saw that dot point, but doesn’t remember expressing his view “quite like that”. But the main point – that being that he believed the Commonwealth’s screw-ups, which were in the public domain, were worse, and doesn’t think that everyone should be punished for them – stands.
My point was CBA had had a series of massive public and customer issues that were well understood – Storm Financial, CommInsure, Austrac. These had been very large, very significant things, and there had been – it had been well reported that those hadn’t been addressed very well.
And my point was simply, ‘We haven’t had that. We have issues. We’re dealing with them.’
And my concern was that the very extensive exercise that CBA was asked to undertake by Apra, which was very large and very comprehensive, seemed – it didn’t seem obvious to me why we should have to do the same exercise.
I wasn’t resistant to us looking at the issues that came out of the report.
In fact, I sent the report to our entire staff and said, ‘Everyone should read this.’
So I – that characterisation is not, I don’t think, a fair summary of how I thought about it.
Brian Hartzer gets to step down. The commission is taking a 10 minute break.
One of the things which has come out of this process is that Westpac had reported “fewer significant breaches than other entities and those breaches had more affected customers and higher financial effects”.
That was largely down to Westpac’s idea of what was a “significant” breach – it’s threshold was much higher.
That’s been changed, Brian Hartzer said, adding that part of the reason was before the commission started, Westpac didn’t have a huge insight into how other banks operated.
Asked about Westpac’s collective culture could have contributed to some of the issues, as well as making cultural change more difficult (because it is not just a few people at the top who have to change how things are done, it’s everyone) Hartzer said this:
I - I could see that collective decision-making could have contributed to slowing down the process of working breaches through the system. And - and I - I can completely understand why from ASICs point of view, if it’s taking longer for breaches to come, they can draw the conclusions that you describe. My perspective being in the organisation is it’s not a lack of intent. But that collective decision-making and not strong enough process around breach reporting could have contributed. It’s something, as I said before, we’re trying to fix.”
Brian Hartzer agrees that the points he has laid out don’t take into account any cultural changes.
The only aspect that I might put in that category would be around, particularly going back a few years, when we had issues related to a particular staff member or something, and legal privilege was looked at before communication to Asic happened.
And so there may have been a sort of over – I know one of the issues we’ve done to try to address the breach thing has been to talk about how we can limit the number of cases when legal privilege would be claimed in the process of working through an issue.
The Westpac boss is now talking about how the bank’s relationship has changed with Asic, and the steps Westpac has taken to change – and why he thinks the bank didnt have that relationship with Asic in the past:
There have been a couple of things. I think – we spoke yesterday about the regulatory team that we’ve beefed up – I think historically we had a little, we were a little too centralised in the relationship with Asic. What that meant was that some of the frontline businesses were not necessarily as plugged in and aware of what was going on or what Asic’s concerns were, so there’s a bit of telephone tag going on. And so businesses might do things that Asic would think, ‘Hey, we told the company that’ but that message wasn’t getting through well enough.
So we’ve taken steps to have more direct meetings between the line executives and Asic counterparts which helps keep that dialogue going. I think that’s, that has been really important.
We’ve had a number of significant legal cases. We don’t like to go to litigation if we can avoid it but we have had a couple of occasions where key [parties] couldn’t agree and ended up in litigation. And that, inevitably I imagine, colours things.
And clearly, there has been some questions around how we deal with notifying Asic of matters and breach reporting, and getting more clarity and control of the process of that, which I suspect has contributed – and that, again, is something we’ve taken steps to address.
(Bear is the Banking Executive Accountability Regime, for those wondering)
Brian Hartzer also doesn’t want the regulator, Apra, to “devolve into too formalistic a mechanism”:
I think Apra is a very good regulator that serves the country well and performs its role very well. I think a bit more formality around the Bear has been broadly helpful. I think it’s important that it not devolve into a box-ticking exercise, which I’m sure we would all agree. But if you start with the premise – and it is my premise – that we set out to do the right thing, we set out to manage our company in a good way.
We set out to have a strong balance sheet, we set out to deliver good outcomes for customers.
Then an interactive relationship with the regulator – where they do poke and prod and it is back and forth and what do you think about that, we’re worried about that – is very helpful.
We find that incredibly valuable. From time to time, appropriately, they pull us up where they think we’re not meeting a standard and they give us a hard time or take more formal action.
That’s fine.
And I think that’s appropriate.
But I would not want it to devolve into too formalistic a mechanism, because the – the – again, if you start with my premise that we’re trying to do the right thing having an interactive dialogue is incredibly helpful.
Michael Hodge lays out Westpac’s submission and asks Brian Hartzer, one by one, about the recommendations for change.Michael Hodge lays out Westpac’s submission and asks Brian Hartzer, one by one, about the recommendations for change.
Hodge: It opposes preventing authorised representatives from recommending a product manufactured or sold by the licensee?Hodge: It opposes preventing authorised representatives from recommending a product manufactured or sold by the licensee?
Hartzer: Yes.Hartzer: Yes.
Hodge: It opposes prohibiting remuneration of financial advisers based on value or volume of sales?Hodge: It opposes prohibiting remuneration of financial advisers based on value or volume of sales?
Hartzer: Entirely, yes.Hartzer: Entirely, yes.
Hodge: It opposes requiring annual as opposed to biennial opt-in notices for ongoing fee arrangements?Hodge: It opposes requiring annual as opposed to biennial opt-in notices for ongoing fee arrangements?
Hartzer: Yes.Hartzer: Yes.
Hodge: It opposes structural separation between product manufacturers and advisers?Hodge: It opposes structural separation between product manufacturers and advisers?
Hartzer: Yes.Hartzer: Yes.
Hodge: In respect of consumer lending it opposes any duty being imposed on intermediaries beyond that imposed by the industry forum?Hodge: In respect of consumer lending it opposes any duty being imposed on intermediaries beyond that imposed by the industry forum?
Hartzer: Yes.Hartzer: Yes.
Hodge: It opposes a ban on trail commissions for intermediaries?Hodge: It opposes a ban on trail commissions for intermediaries?
Hartzer: Yes.Hartzer: Yes.
Hodge: It opposes a ban on introducer programs?Hodge: It opposes a ban on introducer programs?
Hartzer: Yes.Hartzer: Yes.
Hodge: It opposes industry codes being given legal or further legal effect?Hodge: It opposes industry codes being given legal or further legal effect?
Hatzer: Yes.Hatzer: Yes.
Hodge: And do you think that one of the reasons that Westpac opposes each of those changes is because there will be an effect on the profitability of Westpac’s business?Hodge: And do you think that one of the reasons that Westpac opposes each of those changes is because there will be an effect on the profitability of Westpac’s business?
Hartzer: That’s - that’s a component of it but that’s not the main driver. You would have to go through each one and I’m happy to explain our view on them. The way you described that sounds like we’re completely opposed to change, which we’re not, but each of those points has subtleties around them.Hartzer: That’s - that’s a component of it but that’s not the main driver. You would have to go through each one and I’m happy to explain our view on them. The way you described that sounds like we’re completely opposed to change, which we’re not, but each of those points has subtleties around them.
We move onto the ethical culture within the bank, and Michael Hodge lays out every suggestion Westpac has opposed in its submission to the commission.We move onto the ethical culture within the bank, and Michael Hodge lays out every suggestion Westpac has opposed in its submission to the commission.
In plain terms, Westpac responded to the draft recommendations in the interim report. And they don’t really want any of the changes.In plain terms, Westpac responded to the draft recommendations in the interim report. And they don’t really want any of the changes.
Hodge: If you reward somebody based on a particular outcome, then you expect an increase in whatever the metric is for that outcome?Hodge: If you reward somebody based on a particular outcome, then you expect an increase in whatever the metric is for that outcome?
Hartzer: Broadly speaking, yes.Hartzer: Broadly speaking, yes.
Hodge: And for a bank, the way to increase financial performance is to get – one of the ways is to get a customer into a product?Hodge: And for a bank, the way to increase financial performance is to get – one of the ways is to get a customer into a product?
Hartzer: That’s one of the ways, yes.Hartzer: That’s one of the ways, yes.
Hodge: And one of the things that Westpac wants is more customers acquiring products that they want, within the risk appetite of Westpac?Hodge: And one of the things that Westpac wants is more customers acquiring products that they want, within the risk appetite of Westpac?
Hartzer: Yes.Hartzer: Yes.
Hodge: And therefore, variable reward is a way of incentivising your staff to contribute to that outcome?Hodge: And therefore, variable reward is a way of incentivising your staff to contribute to that outcome?
Hartzer: Yes.Hartzer: Yes.
Hodge: And the challenge then that you’ve recognised already is that variable reward can encourage more conduct in order to achieve the outcomes?Hodge: And the challenge then that you’ve recognised already is that variable reward can encourage more conduct in order to achieve the outcomes?
Hartzer: If it’s structured badly, yes.Hartzer: If it’s structured badly, yes.
Hodge: And the problem is it’s easy to measure pure financial performance?Hodge: And the problem is it’s easy to measure pure financial performance?
Hartzer: Yes.Hartzer: Yes.
So now we are getting into how employees are incentivised.
It’s an arduous process. Brian Hartzer very clearly does not want to say that getting more money/business from customers is the behaviour staff would be incentivised for.
So everything Gareth has just laid out is why this line of questioning is so important, as the commission attempts to deep-dive into the banks’ policies.
And then:
Improper conduct by advisers:
Westpac acknowledged that a BT Financial Group adviser had established 72 life insurance policies in the names of clients with no existing accounts, with a view to dishonestly obtaining a benefit through the sale of these policies.
Criminal charges were laid by Victoria police and the adviser was permanently banned by Asic.
Westpac also identified that a financial adviser employed by an authorised representative of Magnitude had performed unauthorised transactions in accounts of five of her clients.
Three of these clients suffered losses as a result of these transactions. The adviser was criminally prosecuted and sentenced for charges including theft.
Westpac acknowledged that $2.75 million has been paid to 1,996 impacted customers as a result of advice fees paid between 1998 and 2012 for BT ‘Investment Wrap’ or ‘SuperWrap’ products that may have been higher than the maximum fee ranges noted in some disclosure documents.
Further to that:
Inappropriate advice:
An Asic review, established in 2015, called the Advice Compliance Program, identified 22 Westpac financial advisers who had provided inappropriate advice and who were reported to Asic.
BT Financial Group participated in Asic’s Advice Compliance Project, as a result of which a further 11 financial advisers were identified as potentially providing ‘problematic advice’.
Since 2015, BT Financial Group has identified a further 15 advisers who may have given inappropriate advice.
As at 29 January 2017, Westpac had paid a total of $12.568 million in compensation to 205 clients, with a further $1.024 million in compensation offered but not yet accepted.
When Westpac made its initial submission to the commission on 29 January 2018, Westpac had not completed its review of the advice received by 468 customers who had been given advice by the initial 22 advisers.
Westpac also provided to the commission some specific examples of the inappropriate advice of four advisers, being:
• an adviser who provided inappropriate personal advice primarily relating to gearing recommendations, with 116 clients requiring remediation;
• an adviser who had provided inappropriate advice relating to establishment of SMSFs and using limited recourse borrowing arrangements to fund the purchase of real property;
• two advisers whose conduct gave rise to concerns of inadequate disclosure, charging of ongoing fees without providing the relevant services, inadequate documentation of client goals and objectives, inadequate risk profiling and no documented reasonable basis for advice provided or superannuation switching; and
• an adviser who had provided standardised advice across his client base and recorded identical goals and objectives for many of his clients.
These four advisers were reported to Asic, and three have been the subject of banning orders.
Want some context for the discussion about Westpac’s behaviour?
Here’s what Westpac told the royal commission at the beginning of the year.
Fees for no service:
Westpac’s financial planning arm – BT Financial Group – began an Ongoing Advice Services review program in 2016. The program identified retail clients who, in the period from 1 July 2008 to 31 December 2015, had been charged fees for ongoing advice, where they had not received the service paid for, or evidence of such service being provided could not located.
As at 31 December 2017, BT Financial Group had paid compensation in excess of $3.2 million to 435 clients as a result of issues identified by the Ongoing Advice Services review program.
Westpac also noted that its 2016-2017 annual results provisioned approximately $24 million (including interest) for refunds of fee payments identified in the Ongoing Advice Services review program.
And we’re back.
We are on a five-minute break. Go get a cup of tea, or something stronger. We’ve got a lot of hours to go.
But Brian Hartzer is not entirely married to the idea of getting rid of the service:
We have a large number of customers who do – it’s not all customers, by any means, but we do have a significant number of customers who do look to us as a trusted source of advice, and we would like to be able to help them with that.
So to just walk away from it entirely to a certain extent is to abandon our customers in an important respect.
And from these questions we get our first big admission of the day – that in moving away from traditional banking services, and into financial planning, banks didn’t really think through what that model would look like.
Because the end game here is profit.
Hodge: Because – and I think one of the points you’re getting at is you – when we talk about this idea of aspiring for a share of a customer’s wallet, what you don’t want is somebody after five years switching from Westpac and going over to one of your competitors?
Hartzer: Correct.
Hodge: You don’t want to lose the, effectively, the profit from that customer?
Hartzer: Correct.
Hodge: ... because you are a profit-making business?
Hartzer: Yes.
Hodge: And do you think that from the consumer’s perspective, the way in which Australian banks have gone into wealth management has been a success?
Hartzer: I think at a high level, clearly not.
Hodge: And what does that suggest to you about the bank assurance model?
Hartzer: I don’t think banks fully thought through how the model needed to evolve to be consistent with being part of a service business that focuses on long-term relationships.
Hodge: Is it the case, do you think, that the movement into wealth management assumed a capacity on the part of banks to provide compliant financial products and financial advice – I’m sorry, not financial products, I will say wealth management products and financial advice when, in reality, the expertise of most banks is only in providing compliant deposit accounts and loans?
Hartzer: That’s one way to look at it. I think banks just underestimated how different the models were and how the model needed to evolve to be consistent with the way banks should run themselves.
Hodge is asking Hartzer lots of questions about the role of financial advice in Westpac’s business.
You can see these questions aren’t really directed towards Hartzer. They’re for the commissioner, Kenneth Hayne.
Remember: this round of hearings, where we’re finally hearing from the bank bosses, is dedicated to understanding policy issues.
The royal commission is trying to figure out what banking practices ought to go in the dustbin of history.
Financial advice, financial planning, the manufacture of worthless wealth products – these things are all in the line of fire for an overhaul or a shredder.